Strategic Behavior in Capital Markets and Asset Prices

44 Pages Posted: 1 Nov 2010 Last revised: 14 Nov 2010

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Date Written: November 1, 2010

Abstract

In this paper we study the impact of the degree of concentration of a financial system on the aggregate demand for housing as well as the feedback effect of the size of the mortgage loan market on lenders’ profits, internal capital accumulation, loan losses and potential bailouts. In a general equilibrium framework with endogenous borrowing constraints, we show that, contrary to the traditional view, competitive lenders can generate larger profits and accumulate more internal capital than monopolistic lenders. Furthermore, in the event of a severe economic downturn, a competitive financial system can withstand a financial crisis just as well as a concentrated financial system. We provide empirical evidence consistent with the main predictions of our model.

Keywords: competitive financial systems, concentrated financial systems, imperfect competition, housing prices, bailouts

JEL Classification: D91,D50, D41, D4, E40, E44, G12, G21, G33

Suggested Citation

Obreja, Iulian, Strategic Behavior in Capital Markets and Asset Prices (November 1, 2010). Available at SSRN: https://ssrn.com/abstract=1701221 or http://dx.doi.org/10.2139/ssrn.1701221

Iulian Obreja (Contact Author)

SEC ( email )

450 Fifth Street, NW
Washington, DC 20549-1105
United States

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